I have this issue on my Windows 11 machine as of a couple of weeks ago. Without me making any changes I now have only local options like fingerprint or pin. This machine has both Onedrive personal and Onedrive Business on it. I removed Onedrive and and reinstalled Onedrive personal only. The external authentication worked again, Onedrive requesting authentication through the app. As soon as I add Onedrive business Onedrive personal reverts to local authentication with no means to choose proper external 2FA.
I have the same Onedrive personal and Onedrive Business setup on two Windows 10 machines, and they both have the personal vault authentication working properly.
I hate having to reinstall OneDrive as I like my defaults to be local and as with so many MS things MS assume you like things to suit them rather than you.